4/06/2010 @ 7:10PM

How To Play The Coming Dollar Crash

Last December I headlined my monthly newsletter “How To Play The Dollar Rally.” The short version is that the same technical indicators that were bullish at the end of last year are beginning to transmit bearish omens. There is likely a bit more on the upside for the dollar before it turns, but this final phase of the rally will press precious metals and crude back. It will provide us with a final buying opportunity before the next leg in the commodity bull unfolds.

Here is what is developing. First is sentiment. Everyone on The Street was bearish and was selling the dollar at its late 2009 lows, but there is nothing like a good rally to bring out the bulls. I guess folks just like to buy high and sell low.

There are, of course, those dyed-in-the-wool dollar bears who refuse to recognize the cyclical aspects of the markets. Nevertheless, I am currently seeing more articles espousing a dollar recovery than talk about a return to new lows.

A good number of the dollar bulls are basing their stand on the weakness in the euro. There is some truth to this argument. The euro has been pushed from over 1.50 in early December to about 1.32 lately, and there should be good support at 1.25-1.30.

If you look at the Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI) patterns on a chart of the
CurrencyShares Euro Trust
you’ll note that neither the MACD nor the RSI are making new lows with the FXE. MACD is about to produce a second buy signal replete with positive divergence. The positive divergence in the RSI since it bottomed out in February is also telling us to start looking for the end of this decline in the euro.

The euro is setting up for at least a short-term trading rally. I believe fundamentals will support this. Germany is going to orchestrate assistance for Greece without getting personally committed. The Germans will use the crisis to augment their position of power in Europe — something they have not had for many years. Things will appear better in “euroland” soon, and that will give the euro support. As it finds support, dollar traders will begin selling.

The technical omens are present in the dollar also. It is not surprising that the MACD and RSI patterns that we see in the U.S. Dollar Index are the mirror image of those in the FXE chart. Beyond that, the Commodity Channel Index on the weekly dollar is hovering at +100.00, and a break below that will produce a major sell signal. Bottom line, the dollar rally looks like it has a little more life left in it, but not much. It may even venture toward 83.50, but my indicators are telling us to be ready to use a last ditch dollar bounce to our advantage.

The best way to play the next turn in the dollar is to use the last phase of the dollar rally to build positions in precious metals. You need to do this now before the dollar’s top is in. We have a little time, but not much. I expect that the dollar will find its final rally high by the end of this month.

As the precious metals markets pull back in response to a stronger dollar, we will see some magnificent buying opportunities in individual mining shares. I have reviewed the downside buy prices; and by and large, they are where they should be.

One exception is that I am raising the buy price on
Gabelli Global Gold, Natural Resources & Income
to $15.50. The indicated dividend is about 10.8% at $15.50. However, don’t get carried away and overload on this one just because they pay a decent dividend.

Yamana Gold
deserves some mention. They have suffered operational problems at El Penon, and production came in shy of their projections. They also took some currency and derivative losses. These elements are disappointing, but I recommend that you continue to hold Yamana. Its per ounce production cost came in a bit more than expected at $366 per ounce, but considering that its reserves should increase substantially in 2010 and considering my outlook for much higher bullion prices, I think we stand to see some very nice appreciation over the next several months in Yamana.

I am leaving the official buy price at $10.50, even though Yamana is selling a bit shy of that. If you are going to add to your positions, don’t pay over $10.50. If you would like a deep “stink bid,” you can shoot for some at $9.00. I am not confident that we will see it that low, but if bullion comes off another $100.00 before turning higher, you never know. At $9.00, I think it is a screaming buy. Of course, always mind diversification and balance in your portfolios.

Rubicon Minerals
has dropped back below our buy price of $4.00. This one is on our list of juniors and carries a little more speculative flavor than the likes of
Goldcorp
or
Royal Gold
. If you have some risk money, purchases at $4.00 or less are warranted.